Investing Guidelines: Management Tenets 97answer, Buffett has learned, is an unseen force he calls “the institutional
imperative”—the lemminglike tendency of corporate management to
imitate the behavior of other managers, no matter how silly or irrational
that behavior may be.
He says it was the most surprising discovery of his business career.
At school, he was taught that experienced managers were honest, intel-
ligent, and automatically made rational business decisions. Once out in
the business world, he learned instead that “rationality frequently wilts
when the institutional imperative comes into play.”^16
Buffett believes that the institutional imperative is responsible for
several serious, but distressingly common, conditions: “(1) [The organi-
zation] resists any change in its current direction; (2) just as work ex-
pands to f ill available time, corporate projects or acquisitions will
materialize to soak up available funds; (3) any business craving of the
leader, however foolish, will quickly be supported by detailed rate-of-
return and strategic studies prepared by his troops; and (4) the behavior
of peer companies, whether they are expanding, acquiring, setting ex-
ecutive compensation or whatever, will be mindlessly imitated.”^17
Buffett learned this lesson early. Jack Ringwalt, head of National
Indemnity, which Berkshire acquired in 1967, helped Buffett discover
the destructive power of the imperative. While the majority of insur-
ance companies were writing insurance policies on terms guaranteed to
produce inadequate returns or worse, a loss, Ringwalt stepped away
from the market and refused to write new policies. ( For the full story,
refer to Chapter 3.) Buffett recognized the wisdom of Ringwalt’s deci-
sions and followed suit. Today, Berkshire’s insurance companies still
operate on this principle.
What is behind the institutional imperative that drives so many
businesses? Human nature. Most managers are unwilling to look fool-
ish and expose their company to an embarrassing quarterly loss when
other “lemming” companies are still able to produce quarterly gains,
even though they assuredly are heading into the sea. Shifting direction
is never easy. It is often easier to follow other companies down the same
path toward failure than to alter the direction of the company.
Admittedly, Buffett and Munger enjoy the same protected position
here as in their freedom to be candid about bad news: They don’t have to
worry about getting f ired, and this frees them to make unconventional
decisions. Still, a manager with strong communication skills should be